For a young Texas couple, it was a cause for celebration – a pregnancy – that put them in debt.
Joshua Shroyer, 33, says his family managed to get by until they received the shocking news in 2016 that they were expecting their third son. After a difficult pregnancy, mom and baby pulled through, but the baby arrived premature at just 26 weeks.
Health problems accompanying the pregnancy forced Shroyer’s wife, Ivonne, to retire from work for about six months, mostly without pay. A teacher in a public school, she earns the main income of the family; Shroyer only earns $15.75 an hour as a grocery store employee. Without her input, things started falling apart.
“We have to be a two-income household: we have the kids, the student loans, the mortgage,” says Shroyer. As medical bills mounted, the family exhausted their emergency savings and began to live on credit cards.
Once they maxed out their cards, the Shroyers fell behind and eventually stopped paying. From there, the situation “snowballed,” says Shroyer. Their credit ratings plummeted, their interest rates skyrocketed, and credit dried up. The Toyota dealership wouldn’t rent them another car.
“I don’t remember what the tipping point was, but one month we just didn’t have enough to cover basic bills,” he says. With three boys relying on him to put food on the table, he needed a way to cover around $400 in expenses. So Shroyer went to one of the only places he thought would work with him: a local payday loan center.
“You don’t want to tell your kids you don’t have eggs or there’s no milk in the cereal today. I’m not going to do that. I’m going to put food in the fridge and pay the extra money.”
The dark side of payday loans
The Shroyers took out a type of unsecured, short-term loan called a payday loan that was fairly easy to get. Unlike a mortgage, you don’t have to provide anything as collateral. In most states, all you need is a valid ID, proof of income, and a bank account.
Although he only needed $400, Shroyer was offered an installment loan of $830 which he agreed to repay over nine months. “I had about $400 in bills to cover, but they don’t let you borrow just what you need; you have to take what they approve you for,” Shroyer says. “Of course you can just return the extra the next day as payment, but I didn’t.”
Shroyer’s approach follows a worrying trend. Every year, millions of people, especially young people, take out these types of loans at extremely high interest rates.
In the past two years, 13% of millennials say they’ve taken out a small, short-term loan like a payday loan, according to a survey of about 3,700 Americans who CNBC Make It produced in collaboration with Morning consultation. That’s about 9.5 million people aged 22 to 37 who have recently used high-cost loans.
Meanwhile, more than half (51%) of millennials say they have strongly considered using these subprime loans. The most common reason? To cover basic expenses such as groceries, rent and utilities, the survey found.
But these types of loans have major drawbacks. First and foremost, they are extremely expensive: the national average annual rate (APR) for a payday loan is almost 400%. It is more than 20 times the average credit card interest rate.
Installment loans like Shroyer’s are also expensive, but they usually offer slightly better rates and a longer repayment period. Shroyer will end up paying around 54% APR, significantly more than the average credit card, but less than the average payday loan.
The other problem with these types of loans is repayment. Pew Trusts found it takes about five months for borrowers to repay the loans and cost them an average of $520 in finance charges. And some lending companies try to get their money back by tapping directly into borrowers’ current accounts, which borrowers grant access to as a condition of the loan. These unexpected withdrawals from the lender can result in costly overdraft fees and damage to credit ratings.
Yet what mattered to Shroyer in the moment was being able to quickly put food on the table. He also calculated that taking out a loan would help him rebuild his credit rating by showing he could pay his bills on time again.
“I knew signing it would come with high fees, high interest – not the best thing in the world,” he says. “But at the very least, I figured I’d have the money with no problem or hassle so I could pay the bills, keep the lights on, the food in the fridge, the gas in the tank.”
Many millennials like Shroyer struggle to maintain a middle-class life. Americans born in the 1940s had a 92% chance of earning more money than their parents. Yet those born in the 1980s only have about a 50% chance of doing the same, according to one 2016 study by the Equality of Opportunity Project.
Meanwhile, the cost of education is skyrocketing. Public universities cost doubled between 1996 and 2016. Shroyer, a graduate of the University of Texas at Arlington, has more than $40,000 in student loans. Combined with his wife, who has a bachelor’s and master’s degree, their household has over $100,000 in student debt.
“Student loan debt could very well exacerbate the weekly and monthly challenges that lead to payday borrowing,” Nick Bourke, director of consumer credit at Pew Charitable Trusts, told CNBC Make It.
Overall, one in four millennials have more than $30,000 in debt, while 11% have more than $100,000 in the hole, according to a March poll by NBC News and GenForward. This includes student loans, as well as credit card and mortgage debt. Only about 22% say they have no debt.
In many cases, millennials are in debt because wages aren’t going as far as they used to, says Alissa Quart, executive director of the Economic Hardship Report Draft and author of the recently released book “In a Hurry: Why Our Families Can’t Afford America“, and the costs of daily living have increased significantly. According to Research benchthe average salary has the same purchasing power as 40 years ago.
“There are forces that are built against you, from your taxes to your job security,” Quart says.
life after debt
Shroyer’s little boy is now one and a half years old and life is slowly returning to normal for his family. But the effects of indebtedness persist.
Because their credit scores declined, the interest rate on the Shroyers’ mortgage jumped, increasing their payment by $500 a month for several months. The extra interest has cost about $6,600 so far, Shroyer says. This is on top of the $12,000 in credit card debt the family is currently carrying.
Meanwhile, Shroyer is still paying off the payday loan, which he refinanced in July for an additional $434 and an agreement to continue paying $135 for another nine months. In total, he will have borrowed $1,267 and he will have to pay $2,160 for what was initially a $400 emergency.
“I pay poor people’s tax. We’re broke, so they charge us extra,” he says. “Things are definitely getting better now, but we’re just more frugal.”
Being cost-conscious affects every decision, from groceries — they buy the Kroger brand when possible to get the 10% employee discount — to healthcare. “Dad has no money for bumps and bumps,” Shroyer tells his sons.
Yet they know that their situation could have been much worse. Shroyer says the emergency savings they accumulated helped them keep the house and the cars.
“Emergency funds are the best idea,” he says. “You have no idea when a real emergency strikes how badly you’re going to need the little acorns you’ve managed to stash away.”
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